Wednesday, September 30, 2015

Once a startup has released the first version of its product, raised some funding, started to get the word out and is getting some traction, the biggest challenge almost always becomes hiring. No matter how great the founders are and how much good advice they get from investors and advisors: You need people to get shit things done. And before long, you need more people (AKA managers) to help other people get shit things done, too. Recruiting great people can be extremely time-consuming and difficult, but if you don’t manage to build a great team, you are guaranteed to fail.

Or, as Michael Wolfe put it in his awesome talk at our 4th annual SaaS Founder Meetup last week:

All companies start differently but end up the same:

Success depends on hiring and managing a great leadership team.

Given that hiring is the #1 challenge for almost all of our portfolio companies, it has always bugged me that we’re not better at helping our founders find great people. It’s not like we haven’t been trying it and sometimes we’ve been able to find someone in our network for an open position at a portfolio company. But I’ve always wished that we’d be able to provide much more help.

Jenny sent me two pics ... and
forgot to tell me that I should pick one. ;-)

That’s why we’re thrilled that we’ve hired an experienced recruiter with a strong network, Jenny Buch, to focus on this challenge full-time. In her role at Point Nine, Jenny will (besides taking care of internal HR issues) advise our portfolio companies on anything related to recruiting, culture, employee engagement and HR strategy and will help them hire awesome people. In her previous roles, Jenny has recruited dozens if not hundreds of people for fast-growing tech startups and we can’t wait to see her magic unfold in the Point Nine family.

Welcome, Jenny!

PS: Hiring a talent manager isn’t a new idea in the VC world, and large firms like A16Z have built big teams to support their portfolio companies in a variety of areas. We can't compete with that, but we’re a little proud that we’re one of the first (the first?) micro VC funds to invest heavily into this role. :)

Monday, September 28, 2015

[This article first appeared as a guest post on VentureBeat. Thank you for publishing it, VentureBeat. I'm re-posting it here with a few small edits.]

Of all posts that I’ve written so far, the one in which I asked what kind of animals you’re hunting was one of the most popular ones. That begs the question: What kind of animals are we hunting?

Paul Graham wants to farm black swans. Dave McClure likes ugly ducklings, little ponies and centaurs. Almost all large VC funds are looking for unicorns, while some people argue that investors should hunt dragons and others talk about decacorns.

If you have no idea WTF I’m talking about, here’s a quick refresher. The term unicorn was coined by Aileen Lee about two years ago to describe those rare and magical tech startups that have reached a valuation of $1 billion or more. Since then, $1B valuations have become somewhat less rare and there are now several private tech companies valued at $10 billion or more, for which the industry has come up with another name: decacorns. Before unicorns were called unicorns, people used to call these rare outlier companies, which create massive returns for their early investors, black swans (or homeruns – back then, it wasn’t mandatory to borrow terms from the animal kingdom). Duckling is Dave McClure’s name for companies that don’t become quite as as huge, and ponies and centaurs is what he calls the ones that have reached valuations of $10 million and $100 million, respectively. Finally, a dragon is a company that returns an entire VC fund.

So – what I mean by the question in the title of this post is what kind of exits we are aiming for. It’s a question which every VC needs to think about: If you have, say, a $250M fund and your goal is to return $1B before costs, should you aim for one huge outlier, e.g. a $10B exit in which you own 10%? Or are you better off shooting for 20% stakes in 50 companies which exit at $100M each? Or something in between?

For large funds the answer is pretty clear. Although the number of smaller exits is of course much bigger than the number of large exits, the exit value is highly concentrated on a small number of huge winners. This power law distribution of venture returns, which Peter Thiel has spoken about extensively, is what makes it almost impossible to return a large fund without hitting one or more outliers. Or as Jason M. Lemkin put it: VCs need multiple unicorns just to survive.

But what about a small (~$60M) early-stage fund like ours? We spent a lot of time thinking about this question in the last years, and our conclusion – or, let’s say working assumption, because it’s still early days for us – is that (sticking to the terminology described above) we’re hunting for dragons, hoping for unicorns.

In spite of the growing number of unicorns in the last years it’s still exceedingly rare for a startup to reach a valuation of $1B or more. According to Aileen Lee’s research, only 0.14% of venture-backed tech startups become unicorns. We can make around 30-40 investments with our fund, so statistically the chances of hitting a unicorn are very low. That doesn’t mean that we’re not trying hard to beat the odds – and if you don’t believe that you can beat the odds you should never become a founder or a VC in the first place – but it means that our business model is not dependent on having a unicorn in every fund that we raise.

We’re small enough for not being dependent on unicorns, but – and that’s the big difference to angel investing – we’re too big for generating a great performance by piling up a larger number of small exits. If we tried to get to, say, $240M in exit proceeds in chunks of $10M (corresponding with e.g. 20% of a $50M exit) we’d need 24 of these exits. It’s not realistic that 60-80% of the companies, in which we invest at a stage when there’s often just a handful of people and a few thousand dollars in revenues, will go on to become $50M exits though. That’s why we need a few of the animals which in the beginning of this post have been called dragons and which we internally just call “fund-makers”: Investments which return an entire fund, which in our case means, for example, 20% of a $300M exit or 15% of a $400M exit.

The final question is if all of this has any practical implications at all. Isn’t it impossible to look at a seed-stage startup and predict how large it can become anyway? Those are very hard prediction to make indeed, but still, knowing what kinds of exits we need informs several important decisions that we have to make – how many companies we want to invest in, what ownership stakes we’re aiming for, how much capital we reserve for follow-on financings, and so on. It also makes it clear that we shouldn’t invest in companies which for some reason we feel don’t have enough potential to move the needle for our fund.

The very last thing I want to say, just to be sure that I’m not misunderstood, is that I have absolutely nothing against unicorns. :-) In fact, we love ‘em. We’ve found two so far, Zendesk and Delivery Hero, so we’ve seen the beautiful side of the power law distribution first-hand. So: Hunting for dragons, hoping for unicorns.